After a steady grind higher in stock markets to start 2013,
Hussman is feeling pretty lonely in the bearish camp.

He writes, "The bears are gone, extinct, vanished. Among
the ones remaining, many are people whom even I would consider to
be either permabears or nut-cases. And yet, the historical
evidence for major defensiveness has rarely been
stronger."

Hussman also takes aim at the biggest catchphrase to emerge in
recent market commentary:
the "Great Rotation." The idea is that 2013 will finally be
the year where large amounts of investment funds flow out of
bonds, which have had an incredible run over the past 30 years,
and into stocks. This rotation largely underpins Wall Street's
call that stocks (proxied by the S&P 500) will appreciate
another 10 percent in 2013.

The newest iteration of the bullish case is the idea of a “great
rotation” from bonds and cash to stocks, as if the outstanding
quantity of each is not held by someone at
every point in time.

The head of a “too big to fail” investment firm argued last week
that stocks are “underowned” – as if every share of stock
presently in existence is not actually owned by someone. To
assert that stocks can be “underowned” seems to reflect either a
misunderstanding of how markets work, or a desire to distribute
overvalued institutional holdings onto the unwashed muppets.

Likewise, the idea of a “rotation” out of bonds and into stocks
begs the question of who will buy the bonds and sell the stocks,
as someone must be on the other side of that
trade. Similarly, to “move cash into the market” requires a
seller of stock who becomes the new holder of said cash.

Quite simply, the reason that pension funds and other investors
hold more bonds relative to stocks than they have historically is
that there are more bonds outstanding, relative to
stocks, than there have been historically. What is viewed as
“underinvestment” in stocks is actually a symptom of a rise in
the gross indebtedness of the global economy, enabled and
encouraged by quantitative easing of central banks, which have
been successful in suppressing all apparent costs of that
releveraging.

The "rotation" fallacy has emerged even in the work of analysts
that we admire. Ray Dalio of Bridgewater talked on CNBC last week
of a move “out of” cash and “into” stocks, seemingly reversing
comments he made only weeks ago at the Dealbook conference
(h/t PragCap) where he suggested that risk premiums are likely to
expand, that the effects of QE are diminishing as we do more
rounds, that we’re facing austerity, that growth is flagging,
that the economy is facing unprecedented risk, and that we face a
slowdown with very little room to maneuver.

Meanwhile, Albert Edwards of SocGen suggested that there has been
an excessive “move away from equities” in recent years – instead
of noting, for example, that the volume of U.S. government debt
foisted upon the public (even excluding what has been purchased
by the Fed) has doubled since 2007, not to
mention other sources of global debt issuance, while the market
capitalization of stocks has merely recovered to its previously
overvalued highs.

...

But the problem with the “great rotation” argument is
that somebody has to hold the
debt. Somebody has to hold the
cash. It cannot go anywhere, and
it is impossible – in aggregate – for the markets to “rotate” out
of it.